Investment Appraisal & ROI: Accounting for Business - RT plc Analysis

This report critically evaluates capital investment appraisal measures for RT plc, focusing on two machine options, A20 and B25. It discusses the usefulness of methods like Accounting Rate of Return, Payback Period, Net Present Value, and Internal Rate of Return in determining the optimal investment. The analysis reveals that while B25 has a higher accounting rate of return and net present value, A20 has a shorter payback period and a higher internal rate of return. The finance director's confidence in IRR exceeding 7% is justified by the positive NPV relative to the initial investment for both options. Ultimately, the report recommends that RT plc should choose project A20 due to its overall profitability and lucrative nature across most evaluation elements. Desklib provides similar solved assignments and past papers for students.

Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Critically discuss the usefulness of the respective capital investment appraisal measures in the
table above and make a recommendation as to which option should be chosen.........................3
Explain why the finance director was so confident that IRR would be well in excess of 7 % for
both options..................................................................................................................................4
CONCLUSION ...............................................................................................................................4
REFERENCES................................................................................................................................6

INTRODUCTION
Accounting is one of the most crucial aspects for each and every firm as it helps in
analysing, evaluating, and summarising all of the factors that are very critical for a firm and thus
help in enabling the company to get an upper hand in the market by taking appropriate decisions
which can help it in the long run scenario (Aouni, McGillis and Abdulkarim, 2017). The report
includes various capital appraising techniques evaluation with respect to the company that is RT
plc and also it includes comparison of various methods so that appropriate one can be chosen.
MAIN BODY
Critically discuss the usefulness of the respective capital investment appraisal measures in the
table above and make a recommendation as to which option should be chosen
There are a number of benefits of the capital appraisal methods as it helps the enterprise
to summarise its performance in general so that necessary measures can be taken which can help
it to sustain and survive in the market which is highly competitive as well as dynamic in nature.
Capital investment appraisal methods aids in forecasting the aspects of the long term that can be
generated on the grounds of the present value, initial investment, rate of return and so on and
thus it could prove crucial as well as essential for a firm to see all of such factors so that it will
assist the respective company to be profitable as well as lucrative in the sector in which it is
operational irrespective of the industry wherein it is working. There are various other advantages
also which are explained in detail below-
 Accounting rate of return- It is the rate which assists in determining the accounting
profitability in terms of percentage so that impactful decisions can be taken with respect
to it so that it can add value (GOVDYA and KHROMOVA, 2018). As it can be seen that
the project that is A20 has a rate of 13% whereas B25 has a rate of 15% and thus it can be
said by it that if seen in this scenario it is profitable for RT plc to opt for B25 as it is more
profitable.
 Payback period- It is described as the period that is required for a project to recover its
initial investment and thus it is preferable at a shorter side. As A20 has a payback period
of 3.67 years while B25 has a payback period of 4.17 years and thus by comparing it can
be seen that the project which is A20 is much more profitable for RT plc and thus the

firm should go for it as it is paying back the amount invested in a much lesser time period
as compared to the latter.
 Net present value- It is the total inflow and outflow of cash that has been generating
during the normal operation of the project. As both A20 as well as B25 does have a
positive net present value that is £105,700 and £112,400 respectively and thus it can be
said that both the projects can be accepted but as B25 is generating higher NPV the
priority must be given to it.
 Internal rate of return- It is a fiscal analysis that helps in evaluating the overall
profitability that is generated and thus it is more preferable at a higher side. As it can be
seen that the IRR for A20 is 10.9% while for B25 it is 9.5% and as it can be seen earlier
as it is discussed as it is profitable at a higher side and thus it could be said that the
former one which is A20 is profitable as compared to the latter one that is B25 as it is low
on terms of profitability (Libby and Salterio, 2019).
Thus it can be concluded from the above findings that the project which is named A20 of
RT plc is much more profitable and also it is very lucrative in most of the elements while the
other project which is named as B25 is not as much beneficial for the firm as compared to the
earlier as it stands well only in one aspect while it is not that good in other methods and so it
could be said after these findings that A20 should be chosen over B25.
Explain why the finance director was so confident that IRR would be well in excess of 7 % for
both options
It can be seen that the financial director is very confident that the IRR will be well over
7% as because the net present value when compared with the initial investment is well over 7%
as it is £105,700 for the project A20 with respect to the initial investment of £1,000,000 as it
comes around 10.57% which is well over the mark (Rozhkova, Blinova and Rozhkova, 2017).
While it is £112,400 for the project B25 as compared with the initial investment of £1,300,000 as
it comes around 8.65% which is also over the mark and thus by this way the finance manager is
very confident that the IRR would be above 7%.
CONCLUSION
It can be concluded from the above that there are distinct methods of analysing the capital
investment appraisal techniques and each one of them has a different benefit. Apart from

that it can be concluded that RT plc's project which is A20 is much more profitable for the
firm as compared to the other one that is B25.

REFERENCES
Books and journals
Aouni, B., McGillis, S. and Abdulkarim, M. E., 2017. Goal programming model for
management accounting and auditing: a new typology. Annals of Operations
Research. 251(1-2). pp. 41-54.
GOVDYA, V. and KHROMOVA, I., 2018. Methodical Aspects of the Decomposition Approach
to the Formation of the Managerial Cost Accounting System in the Organizations of the
Russian Agroindustrial Complex. Journal of Applied Economic Sciences. 13(3).
Libby, T. and Salterio, S. E., 2019. Deception in management accounting experimental
research:“A tricky issue” revisited. Journal of Management Accounting
Research. 31(2). pp. 143-158.
Rozhkova, N., Blinova, U. and Rozhkova, D., 2017, December. The concept of management
accounting based on the information technologies application. In International
Conference on Information Technology Science (pp. 89-95). Springer, Cham.